Daily Market Reports | Dec 16 2015
By Greg Peel
The Dow closed up 156 points or 0.9% while the S&P rose 1.1% to 2043 and the Nasdaq added 0.9%.
My Goodness
MYEFO dominated market sentiment late yesterday on Bridge Street. We could say that Scott and Arnie managed to turn a 41 point rally for the ASX200 into a 19 point fall but this is not quite the case.
In general terms, the budget update was a gloomy one, no matter what spin the pollies tried to put on it. Bigger deficits for a longer period is the headline, but hardly a surprise given commodity price falls and hardly the end of the world when global interest rates are at historic lows. Many of the spending cuts used in the numbers have already been rejected by the Senate, suggesting the government is simply preparing us for an election sooner rather than later.
Specific hits were taken yesterday by healthcare stocks Primary and Sonic on announced pathology subsidy cuts, while the various aged care stocks traded up and down moves on anticipated cuts in that sector. All up MYEFO managed to turn what was a flat market late in the session into a weak close.
It was earlier in the day that the market dismissed the opening 40 point rally. The index shot up from the bell led by the resources sectors, thanks to overnight rallies for both oil and iron ore. But by the end of the day it was these two sectors that registered the biggest falls. Energy closed down 0.6% and materials 1.0%.
There may well have been some influence from Macquarie’s resource sector capitulation. The broker has long been warning that its metal price forecasts were well above spot, and were spot prices substituted in the equation, big valuation cuts would follow. Macquarie was hoping spot prices would rise to meet its forecasts but the opposite has proven true, and thus the broker has slashed target prices and downgraded the ratings of no less than eleven miners within its coverage, many to an equivalent Sell from Buy.
We also had the RBA minutes out yesterday but they proved to be of the broken record variety and had little influence on the stock market. While many an economist is still predicting one to two rate cuts next year, the RBA is certainly showing no signs of planning such a move.
The Aussie dollar is down 0.7% over 24 hours at US$0.7190, but that move occurred overnight on a rally in the US dollar.
Here we go
US data releases last night included the November CPI, which surprised no one by coming in flat for the month on the influence of falling oil prices. The December result is shaping up to be weak as well given not only crude oil but natgas prices have tumbled, driven down by unseasonably warm El Nino weather in the US and a subsequent lack of demand for heating.
The important number is the core CPI, ex food & energy, which rose 0.2% for an annual rate of 2%. There’s the Fed’s target level right there, although the Fed does prefer the PCE inflation measure over the CPI. It’s all academic anyway, given a rate rise tonight is baked in.
It is typical for Wall Street to rally ahead of a Fed meeting, and we’ve seen two lead-up sessions of rallies. In both cases, however, the primary driver has been a rise in oil prices.
On Monday night oil hit a new low before turning tail and rallying strongly to a positive close. Last night the market went on with it, although prices have since drifted back a bit since the official close. WTI is up 2.7%. From the low on Monday night to the high last night, WTI rallied 10%.
“Is the bottom in?” I hear you ask. Could be, or it could just be another short-covering snap-back.
Exxon and Chevron have led the Dow higher these past two sessions but the Dow was up 250 points at its peak last night, when WTI was also at its peak. The way oil prices are driving Wall Street at present one wonders whether the Fed has much of a role to play.
Currency markets were preparing for a rate rise last night nonetheless, sending the US dollar index up 0.6% to 98.25. Having fallen as low as 2.14% on high-yield bond sell-off fears, the US ten-year Treasury yield is back up at 2.27% and ready.
Discussion on Wall Street now is not of the familiar will they/won’t they variety, but of the how will markets respond variety. The removal of uncertainty should be a big positive for Wall Street, but might we see a “sell the fact” response instead?
Well, this time tomorrow we’ll know. Although, as I have often pointed out, the smart money tends not to join in as the headless chooks run around in the last two hours after the 2pm statement release. It waits until the following day, which is often when the market’s response can by truly gauged.
Commodities
Metals markets are nevertheless jittery, despite all and sundry assuming a rate rise is a given. Traders exited LME positions last night ahead of the announcement and on strength in the greenback. Copper and nickel fell over 2% and zinc close to 3%, while lead fell over 1% and aluminium and tin fell 0.5% each.
Iron ore was unchanged at US$37.50/t.
West Texas crude is up US98c at US$37.27/bbl and Brent is up US44c at US$38.35/bbl.
Gold is off a tad at US$1061.60/oz.
Today
The SPI Overnight is up 57 points or 1.2%. Quite a bold move ahead of the Fed meeting.
And nothing else matters much today, or tonight, at least until that decision is released.
If you’re keen, that will be at 6am Sydney time.
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